Re: Problems with calculating the proper compounding

In article
<59eba4c2-4947-4149-b629-f07900d70941@xxxxxxxxxxxxxxxxxxxxxxxxxxx>,
Jim <jim@xxxxxxxxxxxx> wrote:

On Feb 1, 5:59 pm, The World Wide Wade <aderamey.a...@xxxxxxxxxxx>
wrote:
In article
<c8fb3fa8-3680-4de4-ab3c-4e7b991d6...@xxxxxxxxxxxxxxxxxxxxxxxxxxxx>,



Jim <j...@xxxxxxxxxxxx> wrote:
Hello,

I'm creating a spread*** that automatically determines the payment
amount for a mortgage.

The problem that I'm running into is that when the compounding for the
interest rate is different from that of the payment frequency, I'm not
calculating the equivalent rate correctly.

For example:

J12 = 5.75%
Monthly payments
Amortization = 40
n = 40 * 12 = 480

PV
PMT = ~~~~~~~~~~~~~~~~~~~~~~~~~~~~
1 - (1 + (J1/12) ) ^ (-n))
~~~~~~~~~~~~~~~~~~
(J1/12)

^ = exponent

I do that, and then I input J1 instead of J12.

It calculates it very closely, but I know that I'm doing something
wrong.

Can someone please tell me?

Looks like the right formula. Maybe some roundoff error somewhere. Try
its mathematical equivalent,

pmt = PV*(1+r)^n*r/((1+r)^n - 1),

where r is the monthly interest rate (= 5.75%/12 in your example).
That's what I set up in Excel a long time ago and it seems to give me
exact answers.

That is not working.

What do you mean it's not working? It works perfectly. What sort of
lousy software are you using?

I guess really what I want is to know how to find an equivalent rate
if the compounding is different from the payment frequency?? For
example, semi-annual compounding and monthly payments.

I know that the first step is to give a monthly rate that is
equivalent to semi-annual payments, but I don't know how to do it.

Forget that right now. If you can't implement the standard scenario
and get answers the same as at, say, bankrate.com, then there's
something wrong - either with your input into the software, or the
software itself.
.